The green transition takes hold of Germany’s property market

More than 60% of the current German housing stock will need to be renovated over the next ten years to meet climate targets set by the European Commission. The transition will come with soaring costs and increasing house price divergence, with energy efficiency expected to rise rapidly to the top of the list of priorities for buyers.

In search of a new equilibrium

The German real estate market has entered the expected phase of correction on the back of higher interest rates and weakening real disposable income. In the first quarter, real estate prices were down by some 7% year-on-year. This is not a crash but a correction. At the same time, it will take while before the market is able to reach a new equilibrium. We currently see it reaching a bottom in the second half of the year, followed by a muted recovery in 2024. Financing costs and household income remain the most important drivers of the German real estate market, but factors like location and greenification will add to increased divergence.

The real estate sector plays an important role in the country’s efforts to reach climate targets. In 2019, space heating in the private household sector accounted for 17.5% of total energy consumption and is also the source of around two-thirds of final energy consumption in households. Energy is also used for space cooling, heating water, lighting, electrical appliances and cooking.

Less than 20% of household energy consumption in Germany is currently covered by renewable energy.

Share of renewable energy sources and heat pumps in total household energy consumption (2021)

It doesn't come as a surprise that the government is now trying to step up to the plate. The highly debated German Building Energy Act (GEG) has determined that from 1 January 2024, all new buildings must be heated by at least 65% with renewable energy. For existing buildings, a 'decision period' is granted until 2028. From 2045 onwards, no more fossil fuels are to be used for heating.

However, even the greenest heating system is of little use if energy consumption is still high and energy efficiency remains low thanks to poor insulation. As a result, the EU Commission is aiming for all residential properties in the EU to at least carry an energy label of D by 2033.